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Incentives for Diversification and the Structure of the Conglomerate Firm

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Author Info
William J. Marshall
Jess B. Yawitz
Edward Greenberg
Abstract

In this paper, we examine the proposition that both the structures of conglomerate firms and their merger activities evidence a systematic attempt to diversify income sources and reduce the volatility of firms' profits. We test whether firms that are active in one line of business are more likely to be involved in another, the lower is the correlation between returns to the two activities, and whether, ceteris paribus, the likelihood of merger depends inversely on the correlation of cash flows to the principal activities of thecandidates for merger. We conclude that firms do act as if their goals include firm-level diversification.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1280.

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Date of creation: Feb 1984
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Handle: RePEc:nbr:nberwo:1280

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December. [Downloadable!] (restricted)
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  2. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81. [Downloadable!] (restricted)
  3. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring. [Downloadable!] (restricted)
  4. Maloney, Michael T & McCormick, Robert E, 1983. "A Theory of Cost and Intermittent Production," Journal of Business, University of Chicago Press, vol. 56(2), pages 139-53, April. [Downloadable!] (restricted)
  5. Eugene F. Fama, 1972. "Perfect Competition and Optimal Production Decisions under Uncertainty," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 509-530, Autumn. [Downloadable!] (restricted)
  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  7. Grabowski, Henry G & Mueller, Dennis C, 1972. "Managerial and Stockholder Welfare Models of Firm Expenditures," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 9-24, February. [Downloadable!] (restricted)
  8. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May. [Downloadable!] (restricted)
  9. Ross, Stephen A, 1978. "The Current Status of the Capital Asset Pricing Model (CAPM)," Journal of Finance, American Finance Association, vol. 33(3), pages 885-901, June. [Downloadable!] (restricted)
  10. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring. [Downloadable!] (restricted)
  11. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April. [Downloadable!] (restricted)
  12. Michael C. Jensen & John B. Long Jr., 1972. "Corporate Investment under Uncertainty and Pareto Optimality in the Capital Markets," Bell Journal of Economics, The RAND Corporation, vol. 3(1), pages 151-174, Spring. [Downloadable!] (restricted)
  13. Lemelin, Andre, 1982. "Relatedness in the Patterns of Interindustry Diversification," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 646-57, November. [Downloadable!] (restricted)
  14. Greenberg, Edward & Marshall, William J & Yawitz, Jess B, 1978. "The Technology of Risk and Return," American Economic Review, American Economic Association, vol. 68(3), pages 241-51, June. [Downloadable!] (restricted)
  15. Heckerman, Donald G., 1975. "Motivating managers to make investment decisions," Journal of Financial Economics, Elsevier, vol. 2(3), pages 273-292, September. [Downloadable!] (restricted)
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  1. Benjamin Hermalin & Michael Katz, 2000. "Corporate Diversification and Agency," Research Program in Finance, Working Paper Series 1004, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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